Tom Tull, the former chief investment officer of the Employees
Retirement System of Texas (ERS),
the $35 billion state pension fund, and now fellow at AIF Global, an economic think tank, has had a
long and distinguished career, starting in the 1970s. In this exclusive interview with Markets Group’s
Iain Bell, he details his mindset in navigating various crises – including the present one of high inflation
and rising rates – and offers advice on how to develop the right attitude for uncertainty.
Markets Group: Allocators stress the importance of precedent and track record when assessing
managers. Given the uncertainty of today’s inflationary environment, the only precedent we have is
the 1970s, the decade in which you started your career. What were those circumstances and how did
you and your mentors navigate them?
Tom Tull: A lot of things were going on in the ’70s. There was a cocktail of high inflation, economic
stagnation, easy monetary policy – all the basics. It stemmed from social welfare programs and the
wind down of the Vietnam War. With all that, we had a government that was very much inclined to
keep the economy rolling and with that came inflation and ultimately stagflation. Our policymakers
also had the bright idea to convert the U.S. dollar to a fiat currency and take away the backing of gold.
With oil being priced in U.S. dollars and no gold backing, OPEC felt compelled to raise prices. Price
control was the response. All things considered – anything that could go wrong, did go wrong.
What I learned from the ’70s was that you really can’t get wrapped up in the soundbites of the day.
You have to be cautious, selective and thoughtful. Most importantly, you have to ignore the
inclination that you [must] act, that you have to make an investment or that you have to get
involved. I learned early on to let the dust settle. You’re going to have recessions,
inflationary rises – these things will always occur. It’s a matter of being proactive and not reactive.
MG: Another crisis that you worked through was, of course, the Global Financial Crisis of 2007-08.
You joined the ERS as CIO in 2009. How did you recalibrate the fund in wake of the crisis?
TT: I was brought in to help set the strategy for ERS. I took over responsibility as CIO shortly after. The
areas that I concentrated on were severalfold. One, I’m a believer that you shouldn’t run a public
fund like a public fund, but as a business. For that reason, I focused on building the investment
function internally. One of the steps was to first establish the asset classes that we were comfortable
with and compliment what was already in place. Two, to build a team—in fact, we doubled the
staff—and did things internally at one-quarter of the cost. Three, be more proactive in managing
asset classes. We were just beginning to get involved in alternatives and I expanded that to include
private equity, private real estate, infrastructure, hedge funds, venture capital, and expand public
equity internally. After that, 60% of our assets were managed internally. Most importantly, I was
fortunate in having a tremendous team to work with.
We took the view not to just wait for the maturity of these assets. Rather than just buy and subscribe
to certain relationships like private equity, we managed our private assets like we would a public
equity portfolio and utilized the secondary market. We also introduced and put into market
[exchange-traded funds]. We would help originate the ETFs and get revenue share over time. Finally,
we established a platform for emerging managers. They’re thought leaders, good performers, but
they need capital. We leveraged that expertise and provided a service at the same time. So, in times
of crisis or in any time, really, implement a more proactive management process.
MG: How would you advise your peers who are investing in a high-inflation, rising-rate market?
Which do you see as the conditions that will affect strategic allocation now, and where might the
stress come from?
TT: You really have to be careful this time around vs. the past as now we’re seeing the politicization
and weaponization of policy. And policy will extend or constrain the outcome going forward. Leave
your ego at the door and don’t be compelled to invest. There will be tremendous opportunities in
times like this. But there’s no rush. Europe is an area going into recession (if it’s not already in
recession). There’s more than enough time to pick and choose among different asset classes in
Europe such as private equity, credit, private real estate or infrastructure. With the capital that’s
flowed into these asset classes in the region, which are ahead of the game, they need consolidation.
That’s the opportunity.
MG: On the weaponization of policy, we’ve seen the American government blacklist certain Chinese
securities and prevent pension funds from allocating there. What are your thoughts on when policy
weaponization might end?
TT: It will evolve. I think there are two complications whenever governments get involved in dictating
on where, how [and] when you get to invest. One, you’re constraining the ability to influence what’s
important in a given situation. We had this with South Africa, Iraq, Iran, and now China. Whenever
governments get involved it muddies the water. Two, there’s opportunities. If you have good
relationships, throughout these countries, this time will pass. For example, in the U.S., there has
been a political concern with U.S. pension funds investing in China because of accounting rules. Now
we have the accounting groups in China working through this process and it looks as though there
will be more accountability and integrity of accounting statements consistent with U.S. GAP
standards. So, times can change. China will continue to be a problem, but I think it’ll get better as we
go forward. There are tremendous opportunities there and in emerging markets in Asia generally.
MG: If you were to sum up your advice to pension investors today, given where the global economy
might go, with recession in Europe, inflation sticking in certain areas of the American economy,
increasing geopolitical tensions, rising rates and the looming threat of climate change, how would
you do so?
TT: Don’t feel compelled to invest for the sake of investment in negative
environments. There will be plenty of time to do homework to avoid the latest perception of reality.
Overlay that with the curse of social media and fake news. I think it’s going to be a while before we
get back to the heady days of economic growth. We’re wrestling with the Fed, we’re wrestling with
central banks, and we’re wrestling with increased regulatory constraints. With all this, it’s about
picking and choosing and being opportunistic, whether that be in industries such as oil or energy or
in different geographies. Cut through the noise, travel again and visit companies, both globally and in
the U.S., and focus on what’s important to generate competitive risk-adjusted rates of returns.
Interview by Iain Bell
Interview by Iain Bell